From: Kenneth Scott [kenneth.w.scott@worldnet.att.net]
Sent: Thursday, July 18, 2002 10:34 AM
To: Johnathan Katz
Subject: S7-21-02
Mr. Jonathan G. Katz
Secretary, Securities and Exchange Commission
RE file S7-21-02
Wednesday, July 17, 2002
Dear Sir,
Bravo!!
As a small investor, it will be reassuring to me to see that the managers of
public companies are at risk for both their liberty and their fortunes, for
failing to perform their fiduciary duties to the shareholders.
I have never thought that the senior management of any large corporation was
the moral equivalent of 'Mother Theresa', nor do I think it would be
necessarily good if they were. I want them to press the envelope in all
areas and to be creative in the pursuit of a competitive edge. I would also
like to know the 'truth' of their efforts.
Specifically about your proposal, I am not convinced that the language "to
their knowledge" is to my benefit. It brings up the question of competency.
Does the requirement of awareness lead to the deliberate avoidance of
information that may be contrary to the preferred view of the world? Does
this motivate management to ask, 'Do I want to know this'? Can the officers
of a company really be doing their jobs, when at the same time there is
material financial information of which they are unaware?
Beyond that, I would be more reassured if the proposed liability went up the
food chain and included the Board of Directors. I do believe that the same
fiduciary responsibility that should govern the managers should also govern
the directors, and therefore the same level of liability for failing that
responsibility. Would the debacle at Enron have happened in the same way
had the directors been held liable for the behavior of the managers?
Furthermore, could this spirit of accuracy and fairness in reporting be
extended to those who report on the financial markets? I still recall
watching a bubble-headed reporter projecting when NASDQ would pass the DOW.
Now I am hearing from the same talking airhead about the great lack of
confidence on the part of small investors. I am a small investor. My
confidence in the market is as always strong, but my opinion of the accuracy
of 'financial' reporters is greatly reduced. If misleading and inaccurate
information is unacceptable from a corporation, is it not equally
unacceptable from those truly beyond the pale?
It has occurred to me that of the several thousand publicly traded
companies, a handful have been accused of significant illegal and misleading
practices, restatements aside. While on a case-by-case basis, these failures
are tragic on many levels. It remains that 99% or more of the publicly
traded companies are compliant. I have some difficulty grasping the notion
that a system that is 99% effective is fundamentally flawed, that a 1%
failure rate is justification for a dramatic overhaul, or that these
examples of failure are the sole cause of the greatly touted lack of
investor confidence.
On a different note, given the dynamic and evolving nature of our economy
and the changing complexity in financial reports, should we not have a fixed
statement as to the intent and goal of those reports? I believe that a
well-written preamble would bring a level of certainty and clarity to our
GAAP. I suggest that the SEC write in American Standard English (not legal
gibberish) preambles to the current and future GAAP rules, and that those
preambles be an intricate part of, and carry the same legal weight as, the
accounting rules. The SEC should write the preambles and allow FASB to fill
in the detail. Furthermore, I suggest that the preamble delineate that
which is of paramount importance, and be given an overriding and controlling
status relative to the specific language of any one or all of the individual
rules. More importantly, each preamble should be worded so that it
minimizes any unintended consequences of the individual or collective GAAP
rules. Having read, "In order to form a more perfect union", just how
confused can anyone truly be as to the intent of the authors?
I know that the efficiencies of our economy come from our enterprising,
creative, and fundamentally honest people. I do not believe that every
corporate board in the United States exists to plunder the corporation for
which they work. I do believe that the vast majority of those empowered to
control and direct our companies are there for my benefit, as a consequence
of our mutual benefit.
I was an investor, albeit a very modest investor, when Penn Square Bank
collapsed. I was long the market when Drexel folded. I was an investor on
September 10th. I am long the market today, not because of FASB or a
Congressional committee, but because the market is the aggregation of the
greatest social/political economy in the world, and I know business failures
to be part of a healthy economy. While the markets are not perfect, they
are sufficiently, and essentially fair on many levels. Enron, World Com,
Arthur Anderson, or other inevitable stupid human behavior, and a few
million religious fanatics notwithstanding, I remain fundamentally confident
in our economy and therefore, our markets.
While my wealth is not what it was 30 months ago, it is larger than it was 5
years ago, and much larger than 10 years or 20 years ago. I am teaching my
children how to read the financials, how to take risks, and how to pick and
chose among those risks. I will also teach them that the economy suffers
from cycles, and that while in the cyclical downturns, the economic future
will always appear worse, and reported to be much worse, than it actually
is.
I am not sure which worries me more, the shortcomings, not failures, but
shortcomings of the accounting system currently in place, or the draconian
measures that an overzealous Congress may enact in reaction to the economic
upheaval recently experienced. I want creativity in management, not
management handcuffed by regulation. I want management to press the edges
of the envelope, all envelopes, not management curtailed by political
expediency. I want management to work for me, not under the yoke of those
maneuvering for the next election. I also expect management to be held
responsible, personally financially accountable, and personally liable for
their decisions to withhold accurate, detailed and material information from
investors.
I do applaud your suggestions and efforts here. I am certain that having
liberty and fortune at risk will focus the minds of those employed in
management capacities. These GAAP rules, as with any other rule, will not
deter the truly criminal, but may help dissuade the overtly and covertly
creative.
I am certain that this proposal is a giant step down the better path.
Please impose it now.
Respectfully submitted,
Kenneth W Scott
New York